Shaping the future of transaction banking

In the wake of the 2008 global financial crisis, transaction banking has made a return to the spotlight thanks to a renewed appreciation of its “back to basics” mindset and the factors that form its core pillars: stability, transparency, and its role as facilitator of “real” economic activity. But while these underlying principles are the same as they have always been – and show no sign of changing – the industry is far from standing still.

Drivers for change

Dany Eder, Managing Director, Product Line Manager non-USD services, BNY Mellon Treasury Services EMEA

Global transaction banking – comprising trade finance and processing solutions, and cash management and cross-border payments – is undergoing a period of major transformation. Not only are payment volumes soaring (global non-cash payments volumes reached 307 billion transactions in 2011, according to Cap Gemini and RBS) but as risk mitigation – and with it, the need for more adept cash and working capital management – became the market’s priority following the credit crunch, the value of transaction banking has become increasingly recognised. In particular, its advocacy of traditional commercial values such as transparency, and the importance of relationships and open counterparty communication. But as the immediate problems of the post-crisis environment recede, there are further changes afoot. Indeed, the evolution of transaction banking is being influenced by a number of developments – all of which are industry, market and client-led. And such developments beg the question: how can banks ensure that they (and their clients) are best-placed to chart the course ahead?When analysing the changes, the most apparent are those occurring on an industry-wide level. And this means compliance with – and adaptation to – the new regulatory environment. Regulatory initiatives, such as Basel III and Dodd-Frank, demand higher capital and liquidity buffers and more stringent reporting capabilities. Banks, therefore, must be able to provide a granular, real-time view of risk exposures, including intra-day reporting, the tracking of all payment flows, and balance and funding estimates.

The cost of meeting such compliance requirements, combined with the fact they often further squeeze already pressurised margins, has induced many banks to reassess both their geographic and business- line spread. Such analyses have led many to go back to their roots and refocus on their core business. While, in practice, this can mean anything from a decline in future investment in now peripheral activities to a full-scale retreat from whole businesses or geographies, the upshot is industry consolidation, and this will gain further traction as regulatory and market pressures mount.

In line with such regulatory and market pressures, client needs have also evolved. Corporates and non-bank financial institutions (NBFIs) are equally under pressure to meet heightened reporting requirements, meaning they too are looking for enhanced oversight and reporting capabilities, with more intricate and readily-accessible provision of data and analytics. Such enhanced visibility must apply throughout the entirety of the transaction process – providing end-to- end oversight and control over payment flows – as well as enable in- depth real-time data, particularly with respect to intraday liquidity. In relation to this, banks are under greater pressure not only to provide solutions that can help clients in these endeavours, but to yield greater transparency over fees and their own liquidity levels and balance sheet business.In a similar vein, the crisis-induced contraction in liquidity has underscored the need to increase the effectiveness and efficiency of cash flow management – whether by unlocking idle cash that can be put to better use, or by ensuring transactions are both time- and cost- efficient, despite the hurdles presented by cross-border legal, process and system variations. Certainly, commercial organisations of all sizes – from local operators to the largest multi-nationals – are likely to consider the optimisation of working capital and cash flow management as imperative. And this, in turn, means they are placing greater demands on their transaction banks than ever before – seeking true “value- added” service that goes beyond product features and functionality.

Last but not least, the wider market itself has gone through tremendous upheaval. Looking at the turmoil region by region, the eurozone continues to struggle under the burden of its debt crisis; the USA’s economic recovery has been notably sluggish; and even emerging- market powerhouses such as India and Brazil – the bright sparks in the bleak post-crisis years – now show signs of a slowdown after years of rampant growth. Times are changing – and with change comechallenges.

A new era Of course, it’s not all bad news. New initiatives such as the Single European Payments Area (SEPA) are designed to create a significant improvement in market harmonisation and standardisation. Such assimilation of processes and standards is to be encouraged – even if it is likely to put pressure on banks by increasing competition in the payments space, and lowering margins – meaning some local banks may struggle to keep up.Looking further afield, new opportunities can be found both in the rise of intra-emerging market (or “south-south”) trade flows, and in the next wave of “up and coming” economies beyond the BRICs (Brazil, Russia, India and China). Indeed, attention is now turning to the newly- coined MINTs (Mexico, Indonesia, Nigeria and Turkey); a group of countries that promise a combination of healthy GDP growth potential and a growing consumer base.To embrace such opportunities and support the broadening horizons of corporate and NBFI clients, the transaction banking sector must keep pace with the developments at hand. The Chinese renminbi (RMB) and its rapidly-growing role on the international stage provide a case in point. With its increasing accessibility, the currency is likely to positively impact both regional and global payments, bringing transparency, ease of conversion and processing, and the potential for cost savings. As a result, banks hoping to stay in the payments space must channel considerable investment into global payment systems capable of onboarding emerging currencies. Such investment must be supported by expertise and uniform standards of service across currencies and markets. Certainly, global payments require a truly global service – one that combines international currencies (BNY Mellon supports payment transactions in more than 100 currencies) with expertise, relationship management, accessibility and standards of customisation. A “global service”, therefore, is much more than the cross-border provision of technology, although the importance of automated platforms as an industry enabler should not be underestimated.

Of course, questions remain. As new currencies emerge and internationalise, will banks become truly currency-agnostic? Or will these new currencies only be catered to by a select cluster of specialist clearers? As markets recalibrate on a macro level – in line with a shift in economic power from west to east, growing intra-emerging market trade flows, and the rise of new currencies – it is only by understanding these changes and preparing accordingly that banks will be able to keep up, and ensure they are in the best possible position to navigate future hurdles and opportunities alike.

Forging a path ahead As always, this is easier said than done. For example, banks hoping to be selected as foreign currency correspondents must be able to demonstrate in-depth market knowledge, and provide transparency over foreign exchange rates, conversion practices and contingency payment routes. As their clients seek ever-greater levels of visibility and control over cash, banks must be able to provide pooling and other account structures that will ensure efficient cash management across entities and branches. In addition, clients require truly value-added data that clearly outlines payment trends and opportunities for improving straight-through processing rates. And finally, banks should ensure they can offer strong, multi-channel client servicing – including dedicated points of contact, flexible contact hours that reflect today’s 24-hours-a-day, seven-days-a-week business flows, and structured and trackable Service Level Agreements that outline these standards.

These factors, far from comprehensive, are a mere illustration of the numerous expectations now placed on banks, and provide a strong argument in favour of the correspondent banking model. This is a tried- and-tested approach that combines local market knowledge, global reach, and client understanding – the value of which is rapidly rising to prominence.Certainly the challenges incurred by recent sector and market developments – not least the regulatory and cross-border hurdles of the evolving payments arena – mean independent investment in modern technology and expert staff may not be financially viable. And this is where global/local collaboration can provide the best of both worlds – leveraging the global reach and investment strength of specialist providers, in combination with the local-market expertise and experience of local banks. This is an approach long-advocated by BNY Mellon and, when undertaken on a non-compete basis to assuage local operators of competitor concerns, can prove the optimal way to deliver innovative, best-practice solutions at local level in line with local market requirements.

Our recently launched Intraday Liquidity Analytics tool, designed to help customers address liquidity transparency and intraday overdraft coverage requirements under Basel III, is one example of such solutions. Another is the development of our global payments infrastructure which will allow us to deliver payments in virtually any currency to nearly anywhere in the world on a single platform. Focused initially on Euro clearing capabilities, the new infrastructure will extend our established strengths as a processor of US$-denominated payments across the broad array of global currencies. These are just a couple of examples of how we remain committed to investing in technology and using innovative solutions to respond to the changing global payments landscape.

Indeed, “commitment” is the operative word and most important aspect here. Transaction banking will continue to evolve, bringing both opportunities and challenges, and it is only by investing in its future – be it financially, geographically, or in adopting a new collaborative approach – that together we can not only prepare for, but influence the shape of things to come.

The views expressed herein are those of the authors only and do not reflect the views of BNY Mellon or any of its subsidiaries or affiliates. The material contained in this interview is intended for the purposes of general information only. This does not constitute treasury services advice, or any other business or legal advice, and it should not be used or relied upon as such.

This article has been translated from German, and first appeared in Kreditwesen magazine in March, 2014.